Three Triggers? Negative Equity, Income Shocks and Institutions as Determinants of Mortgage Default


In understanding the determinants of mortgage default, the consensus has moved from an ‘option theory’ model to the ‘double trigger’ hypothesis. Nonetheless, that consensus is based on within-country studies of default. This paper examines the determinants of mortgage default across five European countries, using a large dataset of over 2.3 million active mortgage loans originated between 1991 and 2013 across over 150 banks. The analysis finds support for both elements of the double trigger: while negative equity itself is a relatively small contributor to default, the effect of unemployment, and other variables such as the interest rate, is stronger for those in negative equity. The double trigger, however, varies by country: country-specific factors are found to have a large effect on default rates. For any given level of a loan’s Loan to Value (“LTV”) ratio, and as LTV changes, borrowers were more sensitive to the interest rate and unemployment in Ireland and Portugal than in the UK or the Netherlands.

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  1. 1.

    European papers which do consider loan level data (LLD) include many from Ireland, such as Kelly and O'Malley 2014 Kelly (2012), Kelly et al. (2015), McCarthy (2014), Kelly and McCann (2015), and Lydon and McCarthy (2013). Other European contributions utilising LLD include Kroot and Giouvris (2016) in the Netherlands, Lambrecht et al. (2003) in the UK and Gauthier and Leece (2015), also in the UK. Cross-country papers include Burcu and Grant (2006) and Gerlach-Kristen and Lyons (2015), both of which use cross-country panel data in conjunction with aggregate proxies for LTV ratios and outstanding principal.

  2. 2.

    The relevant data taxonomy and template can be found at

  3. 3.

    Notably, the ECB ‘data quality score’ attached to each securitisation does not consider variables which are ‘Not relevant at the present time’ (ND,5) as impacting upon data quality. Thus, even securitisations with an ‘A1’ Data Quality rating may still lack a significant amount of data.

  4. 4.

    This column provides the total default amount before the application of sale proceeds and recoveries.

  5. 5.

    This is the percentage change in the unemployment rate, not the change in percentage points. For example, a change in the unemployment rate from 5% to 4% is encoded in the data as −20(%) (a fall of 20%), not −1.

  6. 6.

    The MRTI is calculated yearly total income at origination, divided by the yearly current ‘payment due’.

  7. 7.

    We control for cross-country differences in mortgage instruments; specifically, the type of principal repayment, the principal repayment method, and the interest rate type, as shown in the table. These variables were included in each of the specifications. Most differences are statistically significant but very small. Moreover, the absence of clear ‘sub-prime’ lending in the data means that most mortgage instrument types are not associated with an a priori impact on default.


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We thank the editors and anonymous reviewers and the following for helpful comments: Niamh Hallissey, Paul Lyons, Fergal McCann, Rory McElligott, and Rhiannon Sowerbutts.

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Correspondence to Andrew Linn.

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This paper was completed while Andrew was at Trinity College Dublin. The views expressed in this paper are those of the authors and not necessarily those of the Bank of England or its committees.


Appendix 1: Average Marginal Effect of Additional Liquidity Constraints

Fig. 6

Mrti average marginal effect by LTV ratio

Fig. 7

Payment due average marginal effect by LTV ratio

Fig. 8

MRTI average marginal effects by LTV ratio and country

Fig. 9

Payment due average marginal effect by LTV ratio and country

Fig. 10

Average marginal effects of LTI including other liquidity controls

Fig. 11

Average marginal effects of LTI excluding other liquidity controls

Appendix 2: Correspondence and comparison between Variables used in Specification 3 and those in Kelly et al.

Table 7 Correspondence between EDW variables and Kelly et al. variables
Table 8 Quantitative Comparison between EDW Data and Kelly et al. Data

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Linn, A., Lyons, R.C. Three Triggers? Negative Equity, Income Shocks and Institutions as Determinants of Mortgage Default. J Real Estate Finan Econ 61, 549–575 (2020).

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  • Mortgage default
  • Negative equity
  • Double trigger
  • European Union